Years ago, I found myself sitting in law school in Moot Court wearing an oversized itchy blue suit. It was a horrible experience. In a desperate attempt to avoid anything like that in the future I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I had a LL.M Taxation. I needed only to don my cape…. taxgirl® was born. Today, I live and work in Philadelphia, PA, one of the best cities in the world (I can't even complain about the sports teams these days). I landed in the City of Brotherly Love by way of Temple University School of Law. While at law school, I interned at the estates attorney division of the IRS. At IRS, I participated in the review and audit of federal estate tax returns. I even took the lead on a successful audit. At audit, opposing counsel read my report, looked at his file and said, “Gentlemen, she’s exactly right.” I nearly fainted. It was a short jump from there to practicing, teaching, writing and breathing tax.

Deduct This: The History of Student Loan Interest

This week, I reached a pretty significant milestone: I finally paid off my undergraduate student loans.

Hold the champagne: I now get to plug away at graduate loans which are much bigger.

Don’t read too much into that, it’s not a complaint in the real sense. I have always considered my education an investment and I am well aware that I would not have been able to go to college and law school without my loans (even though I did fairly well with grants and scholarships). I didn’t grow up in a wealthy family and the cost of an education is pretty staggering. US News and World Report estimates the current cost of attending a private college at around $35,000 per year. That works out to $140,000 for a Bachelor’s degree. I have a Bachelor’s degree plus two law degrees so, well, you do the math.

These numbers mean that student loans are a pretty lucrative business for lenders since Congress has pretty much given them police powers to collect outstanding balances. It’s now a money-making venture; we’ve come a long way since the days when student loans were set up as a means to help students pay for the cost of an education because we believed in an education.

The first loan program in the U.S. was set up at Harvard University in 1840, more than a full quarter of a century before the creation of the Department of Education in 1867. The purpose of the DOE when it began was not so much to administer college loans as to collect information on schools and teaching that would help establish effective school systems.

Things changed a lot after the 1950s. College education began to be viewed not so much as a luxury as a necessity in order to get a job. A lot of folks consider the GI Bill (and subsequent related laws) to be a key factor; the bill allowed veterans to use benefits to pursue an education. By 1976, nearly three quarters of Vietnam veterans had used their benefits to pursue an education.

However, those not entitled to benefits under the GI Bill – meaning civilians – had to save or borrow. With the increasing cost of a college education, borrowing became almost a routine part of a postsecondary education. So, in 1966, the National Association of Student Financial Aid Administrators (NASFAA) was created to oversee what would grow to become the financial aid industry.

Interestingly, the student loan interest deduction wasn’t initially intended to be a special deduction. It was, as all interest was, deductible merely by its existence. The provision for the deductibility of interest was actually part of the first modern income tax system imposed in the US in 1894. After that tax was struck down as unconstitutional, Congress went back to work, creating a new federal income tax system which was made law in 1913.

Student loan interest – just like credit card interest and home mortgage interest – remained deductible until 1986. That year, under then President Ronald Reagan, saw sweeping changes to the Tax Code (the name of which was officially changed after the Act to the Internal Revenue Code of 1986). In addition to the bit we’re most familiar with – dramatically lowering the top tax rate – under the Tax Reform Act of 1986 (“TRA 1986″), a number of deductions were eliminated. Specifically, section 511(b) of TRA 1986 repealed the deduction for personal interest including student loan interest.

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“…after the 1950s [c]ollege education began to be viewed not so much as a luxury as a necessity in order to get a job.”

Interesting. So despite the fact that the vast majority of the population doesn’t have a college degree, it’s a necessity to have a job?

A more plausible and parsimonious explanation is that subsidizing student loans is seen as an easy and politically palatable way for the government to redistribute more to the middle class. Ditto for tax deductibility. It would be gauche to cut checks to middle class people, but who could be against subsidizing education? That’s like hating puppies and love.

ryanp, I think there’s a real sense that having a college degree is a necessity for many jobs these days. The stats increasingly support this idea – the DOL says that 68% of high school grads were in college in 2010 (http://www.bls.gov/news.release/hsgec.nr0.htm). Those are just huge numbers. Clearly it depends on the type of work but as we lose industry and manufacturing jobs, there is an emphasis on R&D, tech and other jobs for which having a degree can be a plus (though again, not mandatory).

Oh, right, it’s totally necessary for many jobs. I’m just saying it’s not a general necessity.

The census dep’t says about 30.6% of 25-29 year olds have a bachelor’s or greater (http://www.census.gov/hhes/socdemo/education/data/cps/2009/Table1-01.xls). Obviously educational attainment increases over time, but I wonder if the DOL 68% figure is picking up a lot of people who are in community or technical colleges or perhaps who ultimately won’t complete a BA?

I am in debt over $53,000 because of student loans right now. I pay over $600 a month. I’m hoping that a few people would find it in thier heart to donate even as little as $20 to me. You can visit http://www.edulender.com/community/firemidget/ and see my progress. Please?

Married student loan borrowers now must consider whether it makes sense to file their taxes separately, because the Income-Based Repayment plan will base monthly student loan payment amounts on joint Adjusted Gross Income unless borrowers file separately. Besides paying at a higher tax rate, married borrowers who choose to file separately will lose access to certain credits and deductions, include the student loan interest deduction! But high-debt borrowers, especially those who work in public service, may have much more to gain in student loan benefits than they have to lose in tax benefits by filing separately. Thanks for a great article, Kelly!